Review your loans for unallowable purpose
Martyn Gordon · Posted on: January 22nd 2026 · read
The ‘unallowable purpose test’ in s441-442 of the Corporation Tax Act 2009 (CTA 09), is a key anti-avoidance provision in the UK’s loan relationship rules. The test operates to restrict relief for loan relationship debits for corporation tax purposes, including when obtaining such relief is a main purpose of the underlying loan relationship.
The test is far from new – it was introduced in FA 1996. However, several recent cases won by HMRC have brought it to the forefront of taxpayers and their advisors’ minds.
In this context it is important to revisit the unallowable purpose test and consider how HMRC and the courts have interpreted it.
Unallowable purpose
The unallowable purpose test is an annual test which must be applied to any loan relationship debits deducted for corporation tax purposes.
An unallowable purpose is defined in s442 as “a purpose which is not among the business or other commercial purposes of the company”.
If securing a tax advantage is the main purpose (or one of the main purposes), of a transaction or arrangement, then that purpose is explicitly treated as unallowable. It is important to realise, however, that the test may also catch arrangements which have no tax motivation, both scenarios are considered below.
Tax motivated?
BlackRock Holdco 5 LLC v HMRC [2024] EWCA Civ 330 (Blackrock) and JTI Acquisition Company v HMRC [2024] EWCA Civ 65 (JTI) both concerned the use of a UK SPV funded by intra-group borrowing, to acquire a third-party business. The facts are complex and individual to each case but in both cases, the result was ultimately a commercial acquisition, and whilst transfer pricing was challenged by HMRC, the intra-group loans in each case were held to be at arms’ length.
The taxpayers argued in both cases that, whilst the corporation tax deductibility of interest charged on the intra-group loan was one of the considerations for the structures used, it was not the main driver in what were commercial transactions.
The courts, however, took a wide view of the facts and circumstances in each case and concluded that the specific entities set up to receive intra-group loans and the resulting tax deductions only existed as a result of a wider group tax planning arrangements and that the deductions were, therefore, unallowable.
A similar conclusion was reached in Kwik-Fit Group Ltd v HMRC [2024] EWCA Civ 434 where intra-group financing was re-arranged to allow for carried forward losses to be used.
Syngenta Holdings Ltd v HMRC ([2024] UKFTT 998 (TC)) (Syngenta), concerned a group re-organisation with the result that a UK holding company acquired subsidiaries from a Dutch holding company, the acquisition being partially funded by intra-group debt.
The Syngenta case was heard after the judgements in Blackrock, JTI and Kwik-Fit and the First Tier Tribunal (FTT) had no hesitation in applying the same premise; that the debt only existed in the company because of a wider scheme to save tax at a group level. In this judgement the court explicitly rejected what it viewed as weak commercial reasoning wrapped around the transaction to support what was essentially a tax motivated scheme. For example, they dismissed arguments that the transaction was to ‘streamline the legal structure’ and ‘rationalise the group’ failing to see benefits commensurate to the scale of the transaction.
The question of whether there is a main or partial tax avoidance motive is a subjective one, which hinges on the intentions of those making the decisions. In the first instance, it falls to the FTT to establish this and since judgement hinges on fact rather than a legal interpretation, the determination by the FTT is hard to overturn in a superior court.
To establish intention in these cases, the FTT made a forensic examination of the meeting minutes, correspondence and other documentation surrounding the setting up of loans as well as taking testimony from those involved.
Reviewing this evidence, they considered factors such as the involvement of entity level vs group level decision makers, why each step in the transaction was structured as it was, the extent to which tax advisors opined on each step and the relative merits of ‘commercial’ arguments in the broader context.
"In all of the cases the FTT showed itself to be sceptical of thin commercial rationale and willing to recognise the existence of a tax related (unallowable) motive even when tax relief arose in a plain vanilla way e.g. deductions for commercial interest charged on a loan."
Uncommercial
The cases above concerned transactions with a tax motivation, but as mentioned in the introduction, the rules operate more widely than simply to counter tax motivated schemes. S442 defines unallowable purpose as “a purpose which is not among the business or other commercial purposes of the company”, tax motivation fits within this definition but is not the only way to trigger it.
The case of Keighley & Anor v Commissioners for His Majesty's Revenue and Customs [2024] UKFTT 30 (TC) (Keighley), quoted in HMRC’s guidance at CFM38100, illustrates this.
Keighley involved two companies each owned by the same two individuals. As articulated by the taxpayer in their defence, this is not a case about complex and convoluted group reorganisations but rather lenders/investors trying to recoup capital from a loss-making venture. What happened in this case was Company A decided to write off part of a secured loan that should have been repaid in full by Company B. Company B then repaid unsecured loans from shareholders/directors, including repaying unsecured loans from the two majority shareholders of Companies A and B.
Company A was in this case subordinated to the will of its capital providers, who caused it to forgo a repayment from a secured debtor for the benefit of other creditors. A decision which was held to be not in the commercial or other business intertest of Company A and therefore the loan write of was treated as being for an unallowable purpose.
This case highlights, that unallowable purpose is not contingent on there being a tax avoidance motive. The unallowable purpose rules, take effect in the first instance where a transaction lacks business or commercial sense.
HMRC pursuing unallowable purpose
HMRC’s recent victories in court mean that they are highly likely to be vigilant for opportunities to apply s441-442, with every expectation of success. Taxpayers must therefore review their existing debt arrangements and ensure that when entering new loans that the provisions are given robust consideration.
Key points
- Unallowable purpose must be assessed for every accounting period.
- Loan relationship debits created wholly or partly to generate a corporation tax deduction are easily challenged and are at considerable risk of being denied.
- Commerciality is key, even where there is no tax motivation, the unallowable purpose rules may apply to deny relief where a loan relationship is deemed uncommercial or unconnected to a company’s main business.
- The commercial drivers of decisions should be clearly documented at board level, but courts are alert to window dressing and after the fact justification for tax related schemes.
- Where a company within a group enters into an arrangement driven by the group tax department the courts are likely to view this as at least partially tax motivated and therefore unallowable.
- And lastly, even if tax is not a motivator – uncommercial transactions in debt may result in tax relief being lost.
